A Jewel of the Aegean

08/27/2008 12:00 am EST

Focus: STOCKS

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of the Forbes International Investment Report, says a big Greek bank is unscathed by the credit crisis.

While it may be premature to declare that the worst of the credit crunch is over for the biggest banks in the US and Europe, there are plenty of smaller banks elsewhere in the world that have emerged relatively unscathed from the crisis. Yet investors have assumed the worst for many of these institutions, and as a result some pretty solid banks are trading at depressed valuations.

National Bank of Greece (NYSE: NBG) is the country’s largest lender. With total assets of $132 billion and 579 branches, NBG has 25% of the Greek banking market. The bank also controls 32% of the local mutual fund market, with $10 billion of assets under management.

With a population of just 11 million, Greece is a small, relatively mature market. For long-term growth, NBG is looking beyond its borders, where its reach currently extends to a dozen countries. In fact, NBG has more than twice as many branches outside of Greece—1,131 to be exact—than at home.

In April 2006, NBG acquired Turkey’s Finansbank, which now accounts for 30% of NBG’s net profit. NBG is also present in Bulgaria, Romania, and Serbia.  Earnings from NBG’s Southeast Europe segment currently account for 12% of net profit, but should comprise a larger proportion over time.

This combination of exposure to growth at home and in these emerging European markets has helped NBG shake off the credit crunch. Net interest income rose 21% to $1.3 billion. Net income rose 25% in the first quarter of 2008 to $622 million, powered by more than 70% growth in Southeast Europe. Return on equity was a healthy 28%, a five-percentage-point improvement over the previous year.

NBG’s Tier 1 capital ratio of 9.2% is at least comparable to, if not better than, most major banks in Germany, France, and the UK. The bank’s nonperforming loan ratio of 3.4% is a bit on the high side, but in line with larger European banks like BNP and Barclays. NBG’s cost/income ratio of 51% is much lower than the 60% to 80% range that is the norm in France and Germany.

In short, NBG offers a considerably better combination of growth and profitability than larger European banks, with arguably less risk. At a recent [price above] $8, NBG shares are more than 36% off their January high of nearly $14. At these levels, NBG is selling for [less than] seven times estimated 2009 earnings, despite long-term earnings forecasts in excess of 20% annualized over the next five years.

While Europe flirts with recession, the Greek economy is still growing at a healthy 3%+ clip. As a bonus, NBG also offers some exposure to frontier markets like Bulgaria and Serbia that would be otherwise impossible to invest in directly.

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